CVS Health Corporation Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Overall Performance: Delivered adjusted operating income of $3.5 billion and adjusted earnings per share of $1.60 in the third quarter. Increased full year 2025 adjusted earnings per share guidance to $6.55 to $6.65.
• Aetna Business: Aetna is industry leader in 2026 Medicare Advantage Stars Ratings, with over 81% of Medicare Advantage members in plans rated 4 stars or higher.
• Business Decisions: Exited individual exchange business, and took actions to address pressures in Health Care Delivery, including goodwill impairment due to tempering Oak Street Health Clinic growth.
• Pharmacy Services: Proud of impact on drug cost, supported government actions on lowering brand prices. Experienced near-term growth rate revision due to client contract market dynamics but achieved new client wins of nearly $6 billion.
• PCW Business: CVS Pharmacy delivered solid performance with pharmacy share gains, playing critical role in improving health of millions through convenient health services.

Segment Performance

• Health Care Benefits: Generated nearly $36 billion in revenue in the quarter, an increase of over 9% from the prior year. Adjusted operating income in the quarter was approximately $314 million. Medical membership was approximately 26.7 million, flat sequentially and down ~445,000 from prior year. Medical benefit ratio was 92.8%, down 240 basis points from prior year.
• Health Services: Generated revenues of over $49 billion, an increase of over 11% year-over-year. Adjusted operating income in the quarter of approximately $2.1 billion decreased 7% from the prior year quarter. Total revenues in Health Care Delivery grew approximately 25% excluding exit impact, but goodwill impairment of $5.7 billion was recorded due to clinic growth tempering.
• Pharmacy & Consumer Wellness: Generated revenues of over $36 billion, an increase of nearly 12% versus the prior year quarter. Revenues in the quarter increased over 14% on a same-store basis. Adjusted operating income decreased approximately 7% from the prior year to approximately $1.5 billion.

Guidance

• Increased full year 2025 adjusted EPS guidance to $6.55 to $6.65 from prior $6.30 to $6.40.
• Expect full year total revenues of at least $397 billion.
• In Health Care Benefits, expect margin improvement at Aetna, tailwind from exit of individual exchange business.
• In Health Services, expect improvement in Health Care Delivery driven by Oak Street Health, modestly lower growth in Caremark.
• In Pharmacy & Consumer Wellness, expect momentum to continue with trajectory improving relative to long-term 5% decline.

Risks

• Medical cost trends remaining elevated.
• Market dynamics causing pressure in contract re-negotiations for PBM.
• Broader industry pressures impacting Medicaid business outlook.
• Uncertainty around the impact of prior year reserve development and other out-of-period items.

Question and Answer

Q: Lisa Gill with JPMorgan asked about PBM side, including headwinds from shift to transparency and future PBM economics.

A: J. Joyner and Prem Shah responded that PBM has driven innovation, TrueCost model is future direction, near-term headwinds not implying long-term viability, and PBM continues to deliver value with durable margins.

Q: Justin Lake with Wolfe Research asked about PCW business growth, drivers of fourth quarter confidence.

A: Prem Shah and J. Joyner discussed PCW's strong performance, investments, script growth, market share gains, and future direction to be shared at Investor Day.

Q: Elizabeth Anderson with Evercore asked about 100 basis points of provider liabilities.

A: Brian Newman explained that provider liabilities dated back to 2018 and worsening individual exchange risk adjustment expectations were the drivers, and it was a one-time related impact.

Q: Michael Cherny with Leerink Partners asked about PBM tailwinds, specialty growth.

A: Prem Shah and J. Joyner talked about biosimilar pipeline, generic pipeline opportunities, CVS Specialty Pharmacy's performance, and DTC initiatives like NovoCare program and IVF therapy rollout.

Q: Eric Percher with Nephron Research asked about Caremark pressure from TrueCost vs mix change.

A: Prem Shah clarified it was not from TrueCost, but from slower GLP-1 growth, autoimmune and HIV category product impacts.

Q: Andrew Mok with Barclays asked about Oak Street recontracting and room for improvement.

A: Brian Newman and Prem Shah mentioned focus on value-based care, clinic growth tempering, and working on payer contract alignment for improved performance.

Q: George Hill with Deutsche Bank asked about retail pharmacy long-term guidance and CostVantage.

A: J. Joyner and Prem Shah discussed CostVantage's multiyear journey, progress in aligning reimbursement with cost of goods, and momentum towards better payer alignment.

Q: Kevin Caliendo with UBS asked about Health Care Benefits MA margin expansion and enrollment.

A: Brian Newman and Steven Nelson talked about expected margin improvement, plan design and footprint discipline, tailwind from exit of IFP business, and cautious outlook on Medicaid amidst industry pressures, with Aetna focused on returning to target margins and regaining industry leadership.